The IMF Takeover of Pakistan

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The IMF Takeover of Pakistan

Many Pakistanis see the terms of the $6 billion bailout package as a hostile takeover of their economy and government.

The IMF Takeover of Pakistan

A Pakistani walks past a shop which is closed due to strike in Peshawar, Pakistan, July 13, 2019.

Credit: AP Photo/Mohammad Sajjad

On July 3, the International Monetary Fund approved a $6 billion bailout package to help “return sustainable growth” to Pakistan’s economy. Throughout the deal spanning 39 months, the IMF will review Pakistan’s progress on a quarterly basis. As part of the agreement, $1 billion has been released to Pakistan.

This is the 13th IMF bailout for Pakistan, with the Fund looking toward the correction of “structural imbalances” in the country. In this regard, the IMF had announced in the negotiations over the past couple of months that Islamabad would have to increase taxation in order to repay external debt and increase foreign exchange reserves.

Details of the agreement reveal the targets that have been set for Pakistan, requiring the country to increase the foreign exchange reserves from the current $6.824 billion to $11.187 billion next year. As a result, the country’s net reserves are expected to increase from negative $17.7 billion to negative $10.8 billion over the same period.

The IMF has further asked Pakistan to pay $37.359 billion in external debt within the duration of the IMF bailout deal. Islamabad owes $14.682 billion of this figure to Beijing, largely due to the China-Pakistan Economic Corridor (CPEC).

The increase in taxation required by the IMF was visible in this fiscal year’s financial budget, with the government increasing the Federal Board of Revenue’s (FBR) tax collection target from 3.94 trillion Pakistani rupees ($25 billion) to 5.5 trillion rupees. The documents further reveal that over the next two years of the bailout package, additional 1.5 trillion rupee and 1.31 trillion rupee hikes in revenue collection have been scheduled.

Even before the budget was passed, the government had already implemented steps to enhance taxation, with hikes in the price of petrol and electricity. Government officials confirm that further hikes are expected next month.

In addition to the heavy taxation, another precondition of the IMF bailout was the devaluation of the Pakistani currency, which the Fund deemed to be artificially valued. With the IMF calling for a “market determined” value of the Pakistani currency, the rupee has lost over half its value since December 2017, resulting in the inflation rate reaching a five-year high at 9.4 percent in April, and expected to rise to over 13 percent, as per the Fund’s forecast.

The All Pakistan Anjuman-e-Tajran (meaning “trader’s association”) calling a nationwide strike is one example of the impact that the rise in taxation has had on local industries. As a result, the working class in Pakistan is rising up against what it calls the “IMF’s imperialistic takeover” of the country.

“[The IMF] package is littered with conditionalities that are putting [a] burden on the lives of ordinary people. Pakistani people and traders have no capacity to pay taxes demanded by the IMF,” Farooq Tariq, spokesperson and the former general secretary of the Awami Workers’ Party, told The Diplomat.

“As part of the package, the IMF installed its own ‘intelligent’ people on key posts. Not only does it serve the IMF’s purpose of increasing its stranglehold over the country, it reflects a total lack of confidence in PTI’s capacity to do the job,” Tariq added. PTI refers to Pakistan Tehreek-e-Insaf, the current ruling party of the country.

Multiple interviews with officials in the Finance Ministry reveal that the appointments of former IMF mission chief Reza Baqir as the governor of the State Bank of Pakistan and former Finance Minister Abdul Hafeez Shaikh as the prime minister’s adviser on finance were enforced by the IMF in the lead up  to the bailout agreement.

When asked, a senior government official told The Diplomat that the IMF forced the issue to install “its own men” amid continued deadlock with former Finance Minister Asad Umar. The IMF’s pressure further escalated after it was revealed that the entirety of the loan Pakistan received from Saudi Arabia and the UAE at the turn of the year was spent to prevent the currency market from crashing.

Senior financial journalist and analyst at FX Empire Shahab Jafry questions the manner in which the IMF has forced the government to manage the local currency’s valuation.

“The currency market was going haywire, and you had to dump the [U.S.] dollar to buy the rupees – to support the local currency. The government says it is letting the rupee free float – it can’t let that happen, the country will collapse in 48 hours,” he told The Diplomat.

“The currency has an annual 5 percent depreciation against the dollar. I don’t see the rupee stabilizing because I don’t see the economy stabilizing. In the modern day, in competitive floating currencies, you have to have a very strong export revenue generation to have a stable currency – or oil reserves, because you are prone to imports and the fluctuation of commodities and currencies can crash markets,” Jafry added.

Observers note the usual IMF pattern in its current dealings with Pakistan, with the Fund employing trusted people in countries where there is large-scale misappropriation of funds obtained from international institutions.

Abdul Hafeez Shaikh, the PM’s financial adviser, was also part of the team that negotiated the 11th bailout package with the IMF as the finance minister during the Pakistan People’s Party (PPP) rule from 2008 to 2013.

Last month, an entire inquiry commission was formed to probe the alleged corrupt practices of the PPP and the Pakistan Muslim League-Nawaz over the past decade. While many see it as an attempt to audit the funding received in the past, others see it as a maneuver led by the current ruling party, the PTI, to victimize its political opponents with the help of the Pakistan Army.

Farooq Tariq maintains that the military establishment has had a role to play in the aggravation of the economy, and the PTI isn’t the first party to seek the Army’s help in maintaining the vicious circle of debt for Pakistan.

“Pakistan goes to the IMF every few years because of its ruling political parties’ inability to run the economy. The reason is very simple: military and debt expenses. Both take up over half of the national budget at present. The successive governments have bowed down to the pressures of the generals and the creditors not to reduce these two unproductive expenditures,” he said.

Where the Army bolsters particular parties to safeguard its economic interests, the IMF wants Pakistan to pursue certain geopolitical interests. For many, the bailout agreement reveals that instead of economic reforms, geostrategic interests are at the heart of the deal.

“The IMF package is a straitjacket for Pakistan’s economy. The IMF document illustrates a very simplistic thought process,” economist and political scientist Farrukh Saleem, the PTI government’s former spokesperson on energy and economy, told The Diplomat.

“They say the budget deficit is extremely high, the solution is to increase the revenue by 45 percent. How exactly? It’s a shrinking economy. Similarly, they say the trade deficit is extremely high, and then devalue the rupee. The IMF isn’t trying to solve Pakistan’s problems at all, the package has zero reforms – be it power, budget deficit, or trade deficit. After all, the IMF is not a purely economic institute, it’s a political institute as well,” Saleem added.

The former spokesperson maintains that the IMF is advancing U.S. security interests in the region by using the bailout package to ensure Islamabad’s compliance. He refers to this year’s WikiLeaks document “Army Special Operations Forces Unconventional Warfare,” originally written in September 2008, as evidence of how the IMF and World Bank are used to serve U.S. regional goals.

Lieutenant-General Talat Masood, former secretary of Pakistan’s Ministry of Defense Production, says there are obvious U.S. goals that the IMF is looking to fulfill.

“They would like to control our nuclear development. They don’t want us to spend on conventional forces and try to match India. They want us to focus on the economy. They don’t want us to use Lashkar-e-Taiba [LeT] and others to destabilize India and Afghanistan. Also, CPEC and our relationship with China is too strong for their liking. They want us to contribute significantly in the Afghan peace process by pushing the Taliban,” Masood told The Diplomat.

Masood believes the recent arrest of LeT chief Hafiz Saeed, in the lead up to Prime Minister Imran Khan’s visit to the United States, underlines that Islamabad has succumbed to the American demands. But Masood is also critical of Pakistan’s own policymaking, which renders it vulnerable to external pressure.

“Pakistan’s policies are so shallow and aren’t based on any foundational principles, and hence can’t be defended. It’s a weakness of policy and the internal structure of Pakistan that they have to succumb to external pressure,” he adds.